Investment Policy

Reso 2020-34 Exhibit “1”

City of Escondido

INVESTMENT POLICY

May 2020

Reso 2020-34 Exhibit “1”

TABLE OF CONTENTS

Page

I. Policy Statement ...... 1

II. Scope ...... 1

III. Prudence ...... 1-2

IV. Investment Objectives ...... 2-3

V. Executive Investment Committee ...... 3

VI. Required Reporting ...... 3

VII. Authorized Financial Institutions and Broker/Dealers ...... 4-5

VIII. Safekeeping and Custody ...... 5

IX. Accountability and Authority ...... 5

X. Ethics and Conflicts of Interest ...... 5

XI. Internal Control ...... 6

XII. Authorized and Suitable Investments ...... 6-12

XIII. Maturity Goals ...... 12-13

XIV. Policy Review ...... 13

XV. Investment Procedures ...... 13

XVI. Investment Strategy and Performance Standards ...... 13

XVII. Investment Pools/Mutual Funds ...... 14

Appendix – Investment Procedure Manual ...... 15-19

Glossary of Terms ...... 20-25

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CITY OF ESCONDIDO INVESTMENT POLICY

I. Policy Statement

This policy establishes the limits within which the City's investment program shall be conducted. Investment goals and objectives are defined. Qualified investment instrumentalities and reporting requirements are identified. Authority, accountability, audit control and procedures governing the investment program are delineated.

The investment policies and practices of the City of Escondido are based upon state law, city ordinance, and prudent money management.

II. Scope

This policy applies to the investment of all funds under the control of the City Treasurer. These funds are accounted for in the City of Escondido’s Comprehensive Annual Financial Report and include:

• General Fund • Special Revenue Funds • Debt Service Funds • Capital Project Funds • Enterprise Funds • Internal Service Funds • Trust Funds

This policy does not apply to the Employees Deferred Compensation Fund and PERS funds, which are administered separately. Also, this investment policy does not apply stocks, bonds, or other securities donated to the Escondido Public Library until such time as the Library Board of Trustees determines to dispose of such securities

Bond proceeds shall be invested in the securities permitted by the applicable bond documents. If the bond documents are silent as to the permitted investments, the bond proceeds will be invested in the securities permitted by this Policy. Notwithstanding the other provisions of this Policy, the percentage limitations listed in elsewhere in this Policy do not apply to bond proceeds.

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III. Prudence

Pursuant to California Government Code Section 53600.3, as amended, the City Council and all persons authorized to make investment decisions on behalf of the City are trustees of the public funds and therefore fiduciaries subject to the following prudent investor standard.

When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill prudence and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law.

The City Treasurer and other individuals who are assigned to manage the investment portfolio, when they are acting in accordance with the City’s investment policy, with written procedures and in reasonable reliance on existing California statutes and when they have properly exercised due diligence, will be relieved of personal responsibility for an individual security’s credit risk or market price changes, provided deviations from expectations are reported in a timely fashion and appropriate action is taken to control adverse developments.

IV. Investment Objectives

A. The criteria for selecting investments by order of priority shall be:

1. Safety. Safety of principal is the City of Escondido’s foremost objective. Investments shall seek to ensure that capital losses resulting from institution default, broker-dealer default, or the erosion of market value are avoided. The City of Escondido shall seek to preserve principal by mitigating the two types of risk: credit risk and market risk.

a. Credit risk, defined as the risk of loss due to failure of the issuer of a security, shall be mitigated by investing in only the highest quality securities (see authorized investments) and by diversifying the investment portfolio so that the failure of any one issuer would not unduly harm the City’s cash flow.

b. Market risk, defined as the risk of market value fluctuations due to overall changes in the general level of interest rates, shall be mitigated by structuring the portfolio to eliminate the need to sell securities prior to maturity; and by prohibiting the taking of short positions, that is, selling securities that the City does not own. It is explicitly recognized, however, that in a diversified portfolio, occasional measured losses may occur, and must be considered within the context of overall investment return.

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2. Liquidity. The portfolio will be structured with sufficient liquidity to allow the City to meet expected cash requirements. The investment portfolio shall remain sufficiently liquid to ensure that projected expenditure requirements of the next six months can be met with a combination of anticipated revenues, maturing securities, and highly liquid investments and shall maintain a minimum level of short-term investments (one year or less) equivalent to 25% of the General Fund operating budget. The duration is also mentioned in the “Maturity” section.

3. Yield. In a manner consistent with the objectives of safety of principal and liquidity uppermost, a yield higher than the market rate of return shall be sought. The core of investments is limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall generally be held until maturity with the following exceptions:

• A security with declining credit may be sold early to minimize loss of principal. • A security swap would improve the quality, yield, or target duration in the portfolio. • Liquidity needs of the portfolio require that the security be sold.

B. It shall be the policy of the City that all idle funds shall be invested consistent with providing adequate cash to meet the City's obligation.

V. Executive Investment Committee

The Executive Investment Committee will act in an advisory and oversight capacity to review and discuss investment portfolio management and investment policy compliance. The City Manager, the City Treasurer, and the Director of Administrative Services will serve as permanent members of the Executive Investment Committee. Other members, as deemed necessary or desirable, may be appointed to the committee by the City Treasurer or the City Manager. The Treasury and Finance Department personnel shall serve as staff to the committee.

VI. Required Reporting

The City Treasurer or his designees shall report to the City Manager and City Council the following reports:

A. A monthly list of list of transactions.

B. Quarterly investment report (as per Government Code Section 53646) will include the type of investment, issuer, date of maturity, par, and dollar amount invested and market value for each security held by the City. The report shall state compliance of the portfolio to the statement of investment policy, or manner in which the portfolio is not in compliance. The report shall state the source of the market value valuation and include a statement denoting the ability to meet the City's expected expenditure

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requirements for the next six months. The quarterly report shall be submitted within 30 days of the end of the quarter.

C. An annual report setting forth a statement of investment policy.

VII. Authorized Financial Institutions and Broker/Dealers

A. The following requirements only apply to purchases made directly by the City and not purchased directly from the issuer

B. General criteria for the selection of financial institutions and broker/dealers shall be developed by the City Treasurer and reviewed by the City Investment Committee.

C. Selection of financial institutions and broker/dealers shall be performed by authorized City staff under direction of the Executive Investment Committee. The City has an established formal procedure process in place for the selection of financial institutions and broker/dealers. As determined necessary by the Executive Investment Committee, the City will distribute a broker/dealer questionnaire to interested and known financial institutions and broker/dealers. The City Treasurer will maintain a list of qualified broker/dealers authorized to provide investment services to the City of Escondido. The list may include primary or regional dealers that are credit worthy and qualify under the uniform net capital rule of the Securities & Exchange Commission Rule 15C3-1.

All financial institutions and broker/dealers who desire to provide investment services must participate in the City’s formal broker/dealer questionnaire process. To be considered, the financial institution or broker/dealers must supply the following as appropriate:

• Completed broker/dealer questionnaire • Proof of Financial Industry Regulatory Authority (FINRA) registration • License to conduct business in the state of California • Audited financial statements demonstrating compliance with state and federal capital adequacy guidelines • Certification of having read and understood and agreeing to comply with the City of Escondido’s investment policy • Evidence of adequate insurance coverage

Qualified broker/dealers selected to do business with the City shall submit annually a current audited financial statement.

After the annual adoption of the City’s Investment Policy by the City Council, a copy shall be sent to all broker/dealers approved to do business with the City. Confirmation of receipt of this policy shall be considered evidence that the dealer understands the City’s investment policies and intends to sell the City only appropriate investments authorized by this investment policy.

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D. General criteria for the selection of banks and savings and loans into which the City shall invest its funds shall be developed by the City Treasurer and reviewed by the

Executive Investment Committee subject to the limitations set forth in this policy.

E. Selection of specific institutions in which City funds may be invested shall be performed by authorized City staff under the direction of the Executive Investment Committee.

F. Institutions in which City funds may be invested shall be classified by the City Treasurer and reviewed by the Executive Investment Committee. The classification shall determine the maximum dollar amount allowable for investment in the specified institution.

G. If the City has contracted with an investment advisor to provide investment services, the investment advisor may use their own list of approved issuers, brokers/dealers and financial institutions with which to conduct transactions on the City’s behalf.

VIII. Safekeeping and Custody

To protect against potential losses by the collapse of individual securities dealers, all deliverable securities owned by the City shall be held in safekeeping by a third party bank trust department acting as agent for the City under the terms of a custody agreement executed by the bank and the City. All deliverable securities will be received and delivered using standard delivery versus payment (DVP) procedures.

IX. Accountability and Authority

A. The Escondido Municipal Code vests authority for and control of investments to the City Treasurer. Responsibility for the investment program is hereby delegated by the City Council to the City Treasurer, for a period of one-year, who shall thereafter assume full responsibility for the investment program until the delegation of authority is revoked. Subject to review, the City Council may renew the delegation of authority each year.

B. The City Treasurer may delegate the authority to conduct investment transactions to qualified and competent officials and employees of the City. Daily management responsibility of the investment program may be delegated to Treasury staff and/or the Assistant Finance Director who shall establish procedures for operation consistent with the investment policy.

C. The City Treasurer may utilize the services of an external investment advisor to assist with the investment program. The advisor shall act in a manner consistent with this Investment Policy and any written directions provided by the City Treasurer or other delegated officials per subsection B above. Furthermore, the advisor may not take possession of the City’s cash or securities. Such investment advisors must be registered under the Investment Advisers Act of 1940.

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X. Ethics and Conflicts of Interest

Officers and employees involved in the investment process shall refrain from personal business activity that conflicts with proper execution of the investment program or impairs their ability to make impartial investment decisions. Additionally, the City Treasurer and the Assistant Finance Director are required to annually file a Statement of Economic Interest as mandated by Government Code Section 91013.

XI. Internal Control

The City Treasurer or his designee shall establish procedures for controlling daily investment transactions and monthly reconciliation of accounts. Separation of functions between the City Treasurer’s Office and the Finance Department is designed to provide an internal review to prevent the potential for converting assets or concealing transactions. The investment portfolio and all related transactions are balanced to appropriate general ledger accounts by the Finance Department on a monthly basis. Such procedure s and controls shall be subject to review and comments by the City’s independent auditor.

XII. Authorized and Suitable Investments

A. Qualifying Investment Instruments Policy:

1. The following instruments are generally approved as qualifying investment instruments for City funds:

a. U.S. Treasury Obligations b. U.S. Agency Securities c. Municipal Securities d. Supranationals e. Negotiable Certificates of Deposit f. Banker's Acceptances g. Commercial Paper h. Repurchase Agreements i. Local Agency Investment Fund (LAIF) of the State of California j. Local Government Investment Pools k. Bank Deposits l. Placement Service Deposits

m. Medium-Term Notes Page 8 of 23 n. Asset-Backed Securities

o. Money Market Funds

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2. Within the qualified investment instrument listing, the Executive Investment Committee may further define, qualify, and restrict use of City investment monies.

3. Trading is prohibited when cash or liquid securities are not available to pay for the securities being purchased. The taking of short positions, that is, selling securities which the City does not own, is also prohibited.

4. Investments which exceed 5 years in maturity require that authority be granted by City Council before purchase. Written authority of the City Council must be granted specifically or as part of an investment program no less than three months prior to the date of purchase (California Government Code Section 53601).

5. Callable agency securities (i.e. securities redeemable in part or in full by the issuer prior to the maturity date) shall not exceed 30% of the value of the portfolio. Callable agency securities which have passed their final call date and are no longer callable will not be included when calculating the 30% limit.

6. The City may invest in floating-rate securities whose coupon resets are based upon a single fixed income index which would representative of an eligible investment (e.g. LIBOR, T-bill, prime, 2-year CMT), provided that the security is not leveraged (e.g. 2 times an index) or has a coupon that resets inversely to the underlying index.

B. Diversification by Type of Investment:

The City is governed by California Government Code, Sections 53600 (et seq.). It shall be the policy of the City that investments shall be diversified with respect to the type of investment instruments used. Percentage limitations and credit rating requirements listed in this policy apply at the time of purchase. If a security owned by the City is downgraded below the minimum credit rating required at purchase, the City Treasurer shall determine the course of action on a case-by-case basis considering such factors as the reason for the downgrade, prognosis for recovery or further rating downgrades, and the market price of the security. Within the context of these limitations, the following investments are generally approved as qualifying investment instruments for City funds, as further limited herein:

1. United States Treasury Bills, Bonds, and Notes, or those for which the full faith and credit of the United States are pledged for payment of principal and interest. There is no limitation as to the percentage of the portfolio, which can be invested in this category.

2. Federal agency or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government- sponsored enterprises. There is no limitation as to the percentage of the portfolio, which can be invested in this category. However, no more than 30% of the portfolio can be invested in any one agency name.

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3. Municipal Debt to include registered state warrants or treasury notes or bonds of this state, including bonds payable solely out of the revenues from a revenue- producing property owned, controlled, or operated by the state or by a department, board, agency, or authority of the state.

Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue- producing property owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the other 49 states, in addition to California.

Bonds, notes, warrants, or other evidences of indebtedness of a local agency within this state, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by the local agency, or by a department, board, agency, or authority of the local agency.

Purchases are limited to securities rated in a rating category of “A” (long-term) or “A-1” (short-term) or their equivalents or better by an Nationally Recognized Statistical Rating Organizations (NRSRO). A maximum of 40% of the portfolio may be invested in this category.

4. United States dollar denominated senior unsecured, unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), or Inter- American Development Bank (IADB) with a maximum remaining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of “AA” or better by an NRSRO A maximum of 30% of the portfolio may be invested in this category. These investments shall be classified as “Supranationals” for reporting purposes.

5. Negotiable Certificates of Deposit (NCD) issued by a nationally or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally-licensed or state-licensed branch of a foreign bank. Purchases are limited to securities rated in a rating category of “A” (long-term) or “A-1” (short-term) or their equivalents or better by an NRSRO. NCDs for which the full amount of the principal and the interest that may be accrued during the maximum term of each certificate is insured by federal deposit insurance are exempt from the rating requirements. A maximum of 30% of the portfolio may be invested in this category.

6. Bills of exchange or time drafts drawn on and accepted by a commercial bank otherwise known as bankers' acceptances. Eligible bankers’ acceptances are restricted to issuing financial institutions that have short-term debt rated in the rating category of “A-1” or its equivalent or better by a NRSRO. Purchases of banker's acceptances may not exceed 180 days to maturity. A maximum of 30% of the portfolio may be invested in this category.

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7. Commercial paper of “prime” quality of the highest ranking or of the highest letter and number rating as provided by a NRSRO. The entity that issues the commercial paper shall meet all of the following conditions: (A) Is organized and operating in the United States as a general corporation; (B) Has total assets in excess of five hundred million dollars ($500,000,000), and (C) Has debt other than commercial paper, if any, that is rated in a rating category of “A” or its equivalent or better by an NRSRO. Purchases of eligible commercial paper may not exceed 270 days. A maximum of 25% of the portfolio may be invested in this category. The City may not purchase more than 10 percent of the outstanding commercial paper of any single issuer.

8. Repurchase Agreements used solely as short-term investments not to exceed one year. The following collateral restrictions will be observed: Only U.S. Treasury securities or Federal Agency securities. All securities underlying Repurchase Agreements must be delivered to the City’s custodian bank or held by a third party custodial agreement. The City or its trustee shall have a perfected first security interest under the Uniform Commercial Code in all securities subject to repurchase agreement. The City shall have properly executed a Master Repurchase Agreement with each counter party with which it enters into repurchase agreements. The total of all collateral for each Repurchase Agreement must equal or exceed, on the basis of market value, 102% of the funds invested against those securities. For any Repurchase Agreement with a term of more than one day, the value of the underlying securities must be reviewed on a weekly basis and the value of the underlying securities brought back up to 102% no later than the next business day. Market value must be calculated each time there is a substitution of collateral.

9. Local Agency Investment Fund. The City may invest in the Local Agency Investment Fund (LAIF) established by the State Treasurer for the benefit of local agencies up to the maximum amount permitted by State Law. The City’s investment in LAIF will be determined according to the City’s liquidity needs and may not exceed the limit set by LAIF for operating accounts. When calculating this limit, the City does not include bond proceeds invested with LAIF. These bond proceeds are held separately to meet arbitrage regulations and are not part of our pooled investments. LAIF has traditionally limited investments to short- term government type bonds. Treasury staff reviews the LAIF statements quarterly to ensure that this practice is maintained.

10. Local Government Investment Pools (LGIP). Shares of beneficial interest issued by a joint powers authority organized pursuant to Section 6509.7 that invests in the securities and obligations authorized in Government Code. Investments will be limited to LGIPs that seek to maintain a stable net asset value. Whenever the City has any funds invested in a LGIP, the City Treasurer shall maintain on file a copy of the LGIP’s current information statement and periodically review the LGIP’s investments. There is no limitation as to the percentage of the portfolio that can be invested in this category.

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11. FDIC insured or fully collateralized bank deposits, including, but not limited to, demand deposit accounts, savings accounts, market rate accounts, and time deposits. To be eligible to receive City deposits, the financial institution must be located in California and have received a minimum overall satisfactory rating, under the Community Redevelopment Act, for meeting the credit needs of California Communities in its most recent evaluation. The amount on deposit in any financial institution shall not exceed the shareholder’s equity. Bank deposits are required to be collateralized as specified under Government Code Section 53630 et. seq. The City Treasurer, at his/her discretion, may waive the collateralization requirements for any portion that is covered by federal deposit insurance. The City shall have a signed agreement with any depository accepting City funds per Government Code Section 53649. The maturity of time certificate of deposits (TCDs) may not exceed 3 years. There is no limit on the percentage of the portfolio that may be invested in bank deposits. However, a maximum of 20 percent of the portfolio may be invested in TCDs

12. Insured deposits placed with a private sector entity that assists in the placement of deposits with eligible financial institutions located in the United States (Government Code Section 53601.8). The full amount of the principal and the interest that may be accrued during the maximum term of each deposit shall at all times be insured by federal deposit insurance. A maximum of 30 percent of the portfolio may be invested in this category. The maximum investment maturity will be restricted to three (3) years.

13. Medium-term notes, defined as all corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. Purchases are limited to securities rated in a rating category of “A” or its equivalent or better by an NRSRO. A maximum of 30% of the portfolio may be invested in this category.

14. Mortgage passthrough security, collateralized mortgage obligation, mortgage- backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable-backed bond with a maximum remaining maturity of five years or less. Securities eligible for purchase shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO. A maximum of 20% of the portfolio may be invested in this category.

15. Money market funds (MMF) are restricted to Government Money Market Funds. Furthermore, these Money Market Funds must have met either of the following criteria: (A) Attained the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs, or (B) Retained an investment advisor with not less than five years’ experience and registered or exempt from registration with the SEC, with assets under management in excess of five hundred million dollars ($500,000,000). Whenever the City has any funds invested in a MMF, the

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City Treasurer shall maintain on file a copy of the MMF’s current information statement. A maximum of 20% of the portfolio may be invested in this category

16. Ineligible Investments. Investments not described herein, including, but not limited to, common stocks, inverse floaters, range notes, or mortgage-derived interest-only strips are prohibited from use in this portfolio.

C. Diversification by Institution.

The City shall seek to diversify its investments within the portfolio to avoid incurring unreasonable risks inherent in over investing in specific investment types, individual financial institutions or maturities.

To promote diversification, no more than 5% of the portfolio may be invested in the securities of any one issuer, regardless of security type; excluding U.S. Treasuries, federal agencies, supranationals, and pooled investments such as LAIF, money market funds, or local government investment pools.

D. Investment Compliance Review

All securities held by the City will be maintained in compliance with Section XII, Authorized and Suitable Investments. The investment portfolio shall be reviewed quarterly to determine compliance with these parameters. Non-compliance events will be evaluated to determine and initiate actions needed to adjust investment yields, maturities, percentage requirements or other, in order to bring the portfolio back into compliance. In the event an instance of non-compliance is recommended by the City Treasurer, authorization may be given by the Executive Investment Committee and the Mayor if done unanimously. All major and critical incidences of non-compliance shall be reported in the quarterly treasurer’s report to the City Council.

Summary Table of the Policy's Authorized and Suitable Investments: 1 Maximum Maximum % with Maximum % of One Minimum Investment Type Maturity 2 Portfolio Issuer Rating 3 U.S. Treasury Obligations 5 years None None None U.S. Agency Securities 5 years 100% 30% None Municipal Securities 5 years 40% 5% A Supranationals 5 years 30% 30% AA Negotiable Certificates of Deposit 4 5 years 30% 5% A Bankers' Acceptances 4 180 days 30% 5% A-1 Commercial Paper 4 270 days 25% 5% A-1 Repurchase Agreements4 1 year None None (5)

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Maximum Maximum % with Maximum % of One Minimum Investment Type Maturity 2 Portfolio Issuer Rating 3 Local Agency Investment Fund N/A $75M None None Local Government Investment Pools N/A None None (6) Bank Deposits 7 5 years 100% 100% (5) Placement Service Deposits7 5 years 30% 30% (7) Medium Term Notes4 5 years 30% 5% A Asset-Backed Securities 4 5 years 20% 5% AA Money Market Funds8 N/A 20% 20% (8)

1. Within the investments permitted by the Code, the City seeks to further restrict eligible investments to the guidelines listed above. In the event a discrepancy is found between this Policy and the Summary Table above, the more restrictive parameters will take precedence. See Section XII of the City Treasurer’s Investment Policy for additional detail. 2. In the absence of a specified maximum, the maximum is 5 years. 3. Minimum credit rating categories apply to the category without regards to modifications (+/-). Credit ratings are from any NRSRO. 4. Per issuer limitations apply across investment types. 5. Collateralization is required. See Section XII of the City Treasurer’s Investment Policy for additional detail. 6. The LGIP must have retained an advisor that is registered or exempt from registration with the Securities and Exchange Commission, has not less than five years of experience investing in the securities and obligations authorized by Code, and has assets under management in excess of five hundred million dollars ($500,000,000). 7. Federal deposit is required for the full amount of the deposit and any accrued interest. 8. Money market funds must have the highest ranking or the highest letter and numerical rating provided by not less than two NRSROs or have an investment advisor that meets certain criteria.

XIII. Maturity Goals

1. Subject to the availability of funds, short-term investments (maturity of one year or less) of the City shall not be less than 25 percent of the General Fund annual operating budget of the City.

2. The percentage of the City's portfolio that may be invested intermediate term (maturity term over one year and not greater than five years) shall be determined by the City Treasurer based on estimated cash requirements.

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3. Long-term investments (over five years to maturity date) shall be made only after review and approval by the City Council. Accordingly, no fixed percentage of the City's portfolio is designed for long-term investments.

4. Additional and/or clarifying maturity guidelines shall be adopted from time to time as devised by the City Treasurer and reviewed by the Executive Investment Committee.

XIV. Policy Review

This investment policy shall be reviewed at least annually to ensure its consistency with the overall objectives of preservation of principal, liquidity, yield, and its relevance to current law and financial and economic trends. The City of Escondido’s investment policy shall be approved by the City Council on an annual basis.

XV. Investment Procedures

The City Treasurer and his/her delegated staff shall establish written investment policy procedures for the day-to-day operations of the investment program consistent with this policy. The procedures should include reference to cash balancing, safekeeping, wire transfer agreements, collateral/depository agreements, and the selection process for financial institutions and broker/dealers. The procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this policy and the procedures established by the City Treasurer.

XVI. Investment Strategy and Performance Standards

The investment portfolio shall be managed with the objective of obtaining a rate of return throughout budgetary and economic cycles, commensurate with the investment risk constraints and the cash flow needs. The City will employ an active management approach that allows for the sale of securities prior to their scheduled maturity dates for purposes of improving the portfolio’s credit quality, liquidity, or return in response to changing market conditions or the City’s circumstances. This Policy recognizes that in a diversified portfolio occasional measured losses are inevitable and must be considered within the context of the overall portfolio's structure and expected investment return, with the proviso that adequate diversification and credit analysis have been implemented.

An appropriate performance benchmark shall be established against which portfolio performance shall be compared on a regular basis. The selected performance benchmark shall be representative of the City’s overall investment objectives and liquidity requirements.

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XVII. Investment Pools/Mutual Funds

A thorough investigation of the pool/fund is required prior to investing, and on a continual basis. There shall be a questionnaire developed which will answer the following general questions:

1. A description of eligible investment securities, and a written statement of investment policy and objectives.

2. A description of interest calculations and how it is distributed, and how gains and losses are treated.

3. A description of how the securities are safeguarded (including the settlement processes), and how often the securities are priced and the program audited.

4. A description of who may invest in the program, how often, what size deposit and withdrawal are allowed.

5. A schedule for receiving statements and portfolio listings.

6. Are reserves, retained earnings, etc. utilized by the pool/fund?

7. A fee schedule, and when and how is it assessed.

8. Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds?

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APPENDIX

CITY OF ESCONDIDO INVESTMENT PROCEDURE MANUAL

Purpose

The purpose of these guidelines is to help create a Procedure Manual to assist Treasury staff with day-to-day investment operations.

References and subjects at the beginning of each section refer to elements in the Investment Policy. In the event a discrepancy between this Appendix and the requirements in the body of the Policy, the requirements listed in the Body of the Policy take precedence.

Cash Review

I. Policy II. Scope IX. Accountability and Authority

The City Treasurer or his/her designee, must review the cash balances and investment portfolio daily, or as needed. Items to be reviewed should include:

a) Balance of City of Escondido’s General Account b) Maturing Investments (includes all investments) c) Large incoming wires from the State, County, and other miscellaneous agencies d) Large outgoing wires such as debt service payments and routine wires such as San Diego County Water Authority, Kaiser, and Workers’ Compensation Service provider and any other routine that may be added e) Accounts payable and payroll disbursements

Investment Selection

III. Prudence IV. Objective XII. Authorized and Suitable Investments XII B. Diversification XIII. Maturity Goals

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The City Treasurer or designee determines how much of the cash balance is available for investment and selects the area of the yield curve that most closely matches the required maturity date based on cash flow needs.

In determining the maturity date, the Treasurer designee, should consider liquidity, cash flow, and expected expenditures. A review of some of the following sources should determine whether the investments should be placed to match projected expenditures or shorter, or take advantage of current and expected interest rate environments:

a) Review daily business publications and commentaries from financial institutions and brokers. b) Read publications, Wall Street Journal, and watch media (CNBC) for general trends of economic interests. c) Input from approved broker/dealers.

Purchasing an Investment

VII. Authorized Financial Institutions and Broker/Dealers VIII. Safekeeping and Custody XII. Authorized and Suitable Investments XII B. Diversification of Investments XIII. Maturity Goals

Financial institutions are selected through a “Request for Proposal” (RFP) process. Broker/dealers are selected through a formal questionnaire process, which helps provide the following evaluation:

a) Financial conditions, strength, and capability to fulfill commitments. b) Overall reputation with other investors. c) Regulatory status of the broker/dealer (all providers). d) Background and expertise of the individual representative.

Selection of financial institutions and broker/dealers shall be performed by authorized City staff under direction of the Executive Investment Committee. The City has an established formal procedure process in place for the selection of financial institutions and broker/dealers. Every three to five years the City will distribute a broker/dealer questionnaire to interested and known financial institutions and broker/dealers. The City Treasurer will maintain a list of qualified broker/dealers authorized to provide investment services to the City of Escondido. The list may include primary or regional dealers that are credit worthy and Rule 15C3-1.

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• Completed broker/dealer questionnaire

• Proof of Financial Industry Regulatory Authority (FINRA) registration • License to conduct business in the State of California • Audited financial statements demonstrating compliance with state and federal capital adequacy guidelines • Certification of having read and understood and agreeing to comply with the City of Escondido’s investment policy • Evidence of adequate insurance coverage

Qualified broker/dealers selected to do business with the City shall submit annually current audited financial statement.

After the annual adoption of the City’s investment policy by the City Council, a copy shall be sent to all broker/dealers approved to do business with the City. Confirmation of receipt of this policy shall be considered evidence that the dealer understands the City’s investment policies and intends to sell the City only appropriate investments authorized by this investment policy.

The Treasurer designee shall be as specific as possible in requesting the offering in purchasing a security. If a particular type of investment or a particular agency is to be excluded due to policy limitations that should be stated to the providers. If collateral is required (i.e. for Repo’s or CD’s) the collateral limitations (excess margin, types of securities, maximum maturity, etc.) should be specified. The City may invest in repurchase agreements provided it has a signed master repurchase contract, which specifies terms and conditions of repurchase agreements.

The following must be determined prior to contacting the providers:

a) Settlement – cash, regular (next day), skip (2 business days), corporate (3 business days) or when-issued if a new issue. b) Amount – either par value or total dollars to be invested. c) Type of security to be purchased or type to be excluded. d) Targeted maturity or maturity range. e) Time limit to show offering – 5 minutes, 15 minutes, or a specified time.

If choosing an external pool (or LAIF or Money Market) as the preferred investment vehicle at the time, the following should be available for inspection prior to purchase and at reasonable time thereafter:

a) LAIF written investment policy and a copy of the “LAIF ANSWER BOOK” (which contains detailed information about LAIF).

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b) A prospectus for the Money Market funds or bank-managed funds. c) The balance of the LAIF account is reviewed to adhere to the City’s investment pool limit.

Before concluding the transaction, the following should be validated:

a) The security selected for purchase meets all criteria including portfolio-diversification, collateralization (if appropriate), and maturity. If the security has any imbedded options such as call provisions or coupon adjustments, these should also be reviewed. Current practice is to buy bullet securities, no callable. The strategy is buy and hold. b) Verify yield. c) Total purchase cost (including accrued interest) does not exceed funds available for

investment. d) Advise the successful provider that their offering has been selected for purchase. e) After confirmation of the purchase, as a courtesy, notify the other broker/dealers that you have placed the investment. Best price may be disclosed if the other broker/dealers ask.

After consummation of the transaction, and prior to settlement date, the following information should be confirmed with the provider in order to ensure prompt and uninterrupted settlement:

a) Reconfirm amounts of transaction (principal, accrued interest, if any, and total cost). b) Reconfirm settlement date. c) Acquire CUSIP number of security, if applicable. d) Obtain a copy of the Bloomberg (trade ticket plus description page).

All qualified broker/dealers have the City’s delivery instructions, which consist of the following:

a) Name of third-party safekeeping agent (currently Bank of New York Mellon Trust, contact designated customer service representative) b) ABA number of safekeeping agent. c) Safekeeping account number.

Settlement and Follow-Through

IX. Accountability and Authority

The City Treasurer or other designee should forward to the safekeeping agent, by fax or e-mail, detailed information regarding investment transaction. The detailed information of the purchased security will consist of:

a) Type of security. b) Par amount, stated coupon, interest yield, maturity date, and CUSIP number.

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c) Specified dollar amount (principal amount, accrued interest, if applicable, and total cost). d) Note the broker of the investment transaction. e) Signature of the Treasurer designee.

A phone call should be made to the safekeeping agent to inform of purchase and confirm receipt of the investment information. When applicable the following should be verified:

a) Provision of receipt or disbursement of funds. b) Internal transfer or wiring of funds. c) Written validation from safekeeping agent. d) Notification of discrepancy prior to acceptance or rejection of the transaction. e) Immediate notification if a fail has occurred: by provider if they are responsible, by safekeeping agent if they are responsible. f) That all verbal and written verifications have been forwarded to and received from applicable parties to ensure that transaction was successfully executed.

Investment Strategy and Performance Standards

XVI. Accountability and Authority

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GLOSSARY OF TERMS

Agencies — agencies of the federal government set up to supply credit to various classes of institutions (e.g., S&Ls, small business firms, students, farmers, housing agencies, etc.)

Amortized Cost — cost of investments adjusted for premiums and discounts. Amortized cost is used to maintain comparability with market value.

Asked — the price at which securities are offered.

Asset-Backed Securities — Securities whose income payments and hence value is derived from and collateralized (or "backed") by a specified pool of underlying assets which are receivables. Pooling the assets into financial instruments allows them to be sold to general investors, a process called securitization, and allows the risk of investing in the underlying assets to be diversified because each security will represent a fraction of the total value of the diverse pool of underlying assets. The pools of underlying assets can comprise common payments credit cards, auto loans, mortgage loans, and other types of assets. Interest and principal is paid to investors from borrowers who are paying down their debt.

Bankers’ Acceptance (BA) — a draft, bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill, as well as the issuer.

Benchmark — a comparative base for measuring the performance or risk tolerance of the investment portfolio. A benchmark should represent a close correlation to the level of risk and the average duration of the portfolio’s investments.

Bid — price a prospective buyer is ready to pay.

Bond Indenture — written agreement specifying the terms and conditions for issuing bonds, stating the form of the bond being offered for sale, interest to be paid, the maturity date, call provisions and protective covenants, if any, collateral pledged, the repayment schedule, and other terms. It describes the legal obligations of a bond issuer and the powers of the bond trustee, who has the responsibility for ensuring that interest payments are made to registered bondholders.

Book Value — a term synonymous with amortized cost.

Broker/Dealer — individual or firm acting as principal in securities transaction.

Callables — securities that the issuer has the right to redeem prior to maturity.

Certificates of Deposit (CD) — a time deposit with a specific maturity evidenced by a certificate.

Collateral — securities pledged to secure the value of an investment or deposit.

Commercial Paper – short-term IOU, or unsecured money market obligation, issued by prime rated commercial firms and financial companies, with maturities from 2 days up to 270 days. It

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is a promissory note of the issuer used to finance current obligations, and is a negotiable instrument.

Comprehensive Annual Financial Report (CAFR) — an annual financial report that contains at a minimum, three sections: introductory, financial and statistical, and whose financial section provides information on each individual fund and component unit. (Definition source: 2005 Governmental Accounting, Auditing, and Financial Reporting (GAAFR)).

Coupon — a) the annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value; b) a certificate attached to a bond evidencing interest due on a payment date.

Custody — a banking service that provides safekeeping for the individual securities in a customer’s investment portfolio under a written agreement which also calls for the bank to collect and pay out income, to buy, sell, receive, and deliver securities when ordered to do so by the principal.

Delivery vs. Payment — there are two methods of delivery of securities: delivery versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with a simultaneous exchange of money. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities.

Derivatives — a) financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor; b) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities).

Discount — the difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount.

Discount Securities — non-interest bearing money market instruments that are issued a discount and redeemed at maturity for full face value, e.g., U.S. Treasury Bills.

Diversification — dividing investment funds among a variety of securities offering independent returns.

Executive Investment Committee — a committee chaired and appointed by the City Treasurer to oversee the day-to-day investment program of the City.

Federal Credit Agencies — agencies of the federal government set up to supply credit to various classes of institutions and individuals, e.g., S&L’s, small business firms, students, farmers, farm cooperatives and exporters.

Federal Deposit Insurance Corporation (FDIC) — a federal agency that insures bank deposits. Deposit coverage increased from $100,000 to $250,000 per depositor in 2008. The increased coverage limits of $250,000 per depositor, per insured institution, was extended indefinitely effective July 2010 with the passage of the Dodd-Frank Act.

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Federal Funds Rate — the rate of interest associated with borrowing a Federal Reserve Bank’s excess reserves. This rate is currently pegged by the Federal Reserve through open-market operations.

Federal Open Market Committee (FOMC) — a committee that sets interest rate and credit policies for the Federal Reserve System, the United States’ central bank. The FOMC has 12 members. Seven are the members of the Federal Reserve Board, appointed by the president of the United States. The other five are presidents of the 12 regional Federal Reserve banks. Of the five, four are picked on a rotating basis; the other is the president of the Federal Reserve Bank of New York, who is a permanent member. The committee decides whether to increase or decrease interest rates through open market operations of buying or selling government securities. The committee’s decisions are closely watched and interpreted by economists and stock and bond market analysts, who try to predict whether the Fed is seeking to tighten credit to reduce inflation or to loosen credit to stimulate the economy.

Federal Reserve System — system established by the Federal Reserve Act of 1913 to regulate the U.S. monetary and banking system. The Federal Reserve System (the Fed) is comprised of 12 regional Federal Reserve Banks, their branches, and all national and state that are a part of the system. The Federal Reserve System’s main functions are to regulate the national money supply, set reserve requirements for member banks, supervise the printing of currency at the mint, act as clearinghouse for transfer of funds throughout the banking system, and examine member banks to make sure they meet various Federal Reserve regulations.

Financial Industry Regulatory Authority (FINRA) — The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 4,750 brokerage firms, about 167,000 branch offices and approximately 634,000 registered securities representatives.

Interest Rate Risk — the risk that investments will lose market value because of increases in market interest rates. A rise in market interest rates will cause the market value of investments made earlier at lower interest rate to lose value. The reverse will cause a gain in market value.

Investment Committee — a committee chaired by the City Treasurer to advise the City Treasurer on policies governing the City's investment program.

Laddered Portfolio — bond investment portfolio with securities in each maturity range (e.g. monthly) over a specified period of time (e.g. five years).

Leverage — investing with borrowed money with the expectation that the interest earned on the investment will exceed the interest paid on the borrowed money.

Liquidity — the ability to turn an asset into cash. The ability to buy or sell an asset quickly and in large volume without substantially affecting the asset’s price.

Local Agency Investment Fund (LAIF) — the aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment.

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Local Government Investment pool (LGIP) — a type of pooled investment program in which funds from local agency investors/participants are aggregated together for investment purposes.

Market Value — the price at which a security is trading, usually the liquidation value.

Master Repurchase Agreement — a written contract covering all future transactions between the parties to repurchase reverse repurchase agreements that establish each party’s rights in the transactions. A master repurchase agreement will often specify the right of the buyer-lender to liquidate the underlying securities in the event of default by the seller-borrower.

Maturity — the date upon which the principal or stated value of an investment becomes due and payable.

Modified Duration — a measure of the sensitivity that the value of a fixed-income security has to changes in market rates of interest. Modified duration is the best single measure of a portfolio’s or security’s exposure to market risk. Modified duration identifies the potential gain/loss in value before the gain/loss actually occurs. It is a prospective measurement, e.g., a modified duration of 1.5 indicates that when and if a 1% change in market interest rates occurs, a 1.5% change in the value of a security will result. Investments with modified durations of one to three are considered to be relatively conservative.

Money Market — the market in which short-term debt instruments (Treasury bills, commercial paper, bankers’ acceptances, etc.) are issued and traded.

Money Market Fund — A type of mutual fund that invests exclusively in short-term investments.

Nationally Recognized Statistical Rating Organizations (NRSRO) — a credit rating agency (CRA) that issues credit ratings which the U.S. Securities and Exchange Commission (SEC) permits other financial firms to use for certain regulatory purposes.

Offer — price at which someone who owns a security offers to sell it, also known as the asked price.

Open Market Operations — activities by which the Securities Department of the Federal Reserve Bank of New York, popularly called the desk, carries out instructions of the Federal Open Market Committee designed to regulate the money supply. Open market operations are the Federal Reserve’s most important and most flexible monetary policy tool.

Portfolio — collection of securities held by an investor.

Primary Dealer — investment dealers authorized to buy and sell government securities in direct dealings with the Federal Reserve Bank of New York in its execution of Fed Open Market Operations. Such dealers must be qualified in terms of reputation, capacity, and adequacy of staff and facilities.

Prudent Investor Rule — an investment standard. In California, persons authorized to make investment decisions on behalf of a local agency are considered trustees and therefore fiduciaries subject to the Prudent Investor Rule. A trustee may invest in a security if it is one which would

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be bought by a prudent person of discretion and intelligence who is seeking a reasonable income and preservation of capital.

Rate of Return — the yield obtainable on security based on its purchase price or its current market price.

Repurchase Agreement (RP or REPO) — agreement between a seller and a buyer, usually of U.S. government securities, whereby the seller agrees to repurchase the securities as an agreed upon price and usually, at a stated time. The security “buyer” in effect lends the “seller” money for the period of the agreement, and the terms of the agreement are structured to compensate him for this. Dealers use RP extensively to finance their positions. Exception: when the Fed is said to be doing RP, it is lending money that is, increasing bank reserves.

Required Reports — Section 53646 of the California Government Code specifies that certain information may be periodically transmitted to the City's governing body and chief executive officers by the City's chief fiscal or investment officer.

Safety — the ability of a security issuer to guarantee redemption of their security.

Safekeeping — sees custody

Secondary Market — a market made for the purchase and sale of outstanding issues following the initial distribution.

Securities & Exchange Commission (SEC) — an agency created by Congress to protect investors in securities transactions by administering securities legislation.

SEC Rule 15C3-1 — see Uniform Net Capital Rule.

Time Deposit — a savings account or certificate of deposit held in a financial institution for a fixed term.

Treasury Bills — a non-interest bearing discount security issued by the U.S. Treasury to finance the national debt. Treasury Bills have a maturity of one year or less.

Treasury Bonds — long-term coupon-bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of more than 10 years.

Treasury Notes — medium-term coupon bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from one to ten years.

Uniform Net Capital Rule — Securities and Exchange Commission requirement that all SEC registered broker/dealers maintain sufficient liquid resources to promptly satisfy their liabilities, including all claims by customers, creditors and other broker-dealers. The rule requires broker- dealers to maintain the greater of (1) a specified percentage of net capital as it relates to either total broker indebtedness or total customer receivables, or (2) a specified dollar amount.

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Yield -The annual rate of return on an investment generally expressed as a percentage of the securities current price.